■ This study finds that the weakening of the Korean won reduces import value temporarily and, in the mid-term, expands export value, narrowing the trade deficit.

- Since the US dollar is the usual choice for payment in international trade, the depreciating won has little impact on export volume in the short term. In contrast, import volume plunges due to the rising import value (in terms of the Korean won).

- In the medium term, as product prices are gradually adjusted, the weaker Korean won has a growing impact on the volume of imports.

■ While the recent rise of the dollar has caused a short-term increase in the trade deficit, the analysis shows that the rising rate of won/dollar has partially offset the deficit.

- The dollar rally in Q2 and Q3 this year brought about a contraction in overall trade, expanding Korea’s trade deficit by $6 billion for the said period.

- On the other hand, the rising won/dollar rate is estimated to offset the trade deficit by $2 billion during that period.

- Price adjustment via increasing the won/dollar rate progresses gradually, and the recent strength of the dollar is estimated to reduce the trade deficit by $6.8 billion in the next two years.

■ Fluctuating exchange rates can affect the economy through various channels, and this study reaffirms that currency fluctuations function to mitigate trade imbalance.

- Monetary policies appropriate for the macroeconomic conditions of each country cause exchange rates to move, alleviating imbalances between countries.

- Accordingly, the currency rate should be allowed to float in line with the supply and demand of the foreign exchange market as long as it operates smoothly and stably.

■ In addition to macroeconomic stability, policy efforts should also seek to protect vulnerable people in economic hardship due to soaring import prices in the dollar rally.

- With persistent high inflation, rising prices of items like petroleum products, electricity, and gas, closely tied to import prices, may put further pressure on the vulnerable.

- As sweeping policy support for the vulnerable risks conflicts of interest with the policy effort to tame high inflation, policy protection for vulnerable groups should look for ways to provide selective assistance.

■ To enhance the macroeconomic stabilization of foreign exchange rates in the longer term, an environment conducive to wider use of Korean won in international transactions in goods should be promoted.

- When international transactions are settled mostly in dollars, the short-term effect of currency fluctuations on exports is insignificant, thus limiting the adjustment of trade imbalance.

- In the medium to long run, the government should work to lay the ground for the Korean won to serve as a settlement currency in international trade by strengthening its macro-prudentiality and enhancing the financial and foreign exchange market systems.